Middle East to play centre stage in future of global energy needs

Dec 31, 2003 01:00 AM

by Peter J. Robertson

In recent months, the media seems to be giving top billing to pessimists and naysayers about the Middle East. But
I’m optimistic about the future of all the Middle Eastern countries.
There’s no question that global demand for oil and gas will continue to rise over the next 20 years and the
Middle East will be tasked with satisfying much of this demand. By 2020, oil is still expected to account for some 40
% of the world’s total energy supply, and natural gas another 30 %. Certainly renewables and other alternative
forms of energy will grow in importance and contribute to the energy mix, but they’ll meet but a fraction of
the rising demand. Indeed, the International Energy Agency estimates that at best renewables will provide for less
than 10 % of the world’s energy needs by 2020.

Without question, oil from the Caspian, West Africa, Latin America and other regions that have opened their doors to
foreign investment will help provide new sources of supply. But the Middle East will remain centre stage. In fact,
its contribution to global energy supplies will become even more critical. The region holds over 65 % of the
world’s proven oil reserves and virtually all of the world’s excess capacity. This is important as we saw
during the Iraq crisis, the Nigerian disruptions and the Venezuelan oil strike.
As for natural gas, the Middle East contains 36 % of the world’s gas reserves: a storehouse of energy that is
virtually untapped. So, there is huge growth potential for this energy resource. While the region’s gas was
once considered a stranded resource, advancements in technologies for both liquefaction and gas-to-liquids are making
it a viable part of the future energy mix.

It will take billions of dollars in new investment, the latest technologies and highly skilled human resources to
unlock this region’s full energy potential. It will be an enormous challenge but not one that the producing
nations should have to meet on their own. For years, self-imposed restrictions have limited the ability of many
Middle East countries to involve foreign companies in the development of their energy resources.
But there are encouraging signs that this situation is changing. Across the region, governments are moving toward
economies that are invigorated by the private sector. This trend is widespread: Saudi Arabia has adopted new laws to
promote investment. And under Crown Prince Abdullah, it’s moving toward opening its gas sector to new
exploration and development.

Less than two months ago, Saudi Aramco entered into a joint venture that will allow an international energy
consortium access to natural gas acreage in the Rubi al-Khali desert. And it has invited other energy firms to
explore other acreage as well. These are landmark events signalling the kingdom’s desire to partner with
foreign interests in a truly significant way.
Kuwait has committed to a program designed to reduce the state’s role in the economy, to increase the role of
the private sector and to decrease subsidies and barriers against foreign competition. Just recently, three
international oil consortiums ­- including one led by ChevronTexaco -­ expressed their intent to bid on the
opportunity to manage and increase production from oil fields in northern Kuwait. While this is basically a contract
for services, the winning bidder will have the opportunity to demonstrate its technical expertise and be rewarded for
exceeding performance targets.

Foreign investment in the energy sector has long been welcome in the United Arab Emirates. Dubai has earned the title
"Singapore of the Middle East" by taking the lead in encouraging foreign trade and investment, and Abu Dhabi is
spearheading the privatisation of utilities here in the UAE. And foreign partners in turn recognize that management,
skilled employment and technology must go hand-in-hand with their investment. The Al-Maktum family and Sheikh Zayid
bin Sultan al-Nuhayyan, who brought the emirates together into one nation in 1971, deserve great credit for the
progress we continue to see here.
Within the past several years, an increasing number of Middle Eastern nations have been accepted into the World Trade
Organization, with its commitment to free trade and open markets. It’s my hope that Saudi Arabia and Oman will
soon achieve their goal of becoming full members. I’m also encouraged by steps being taken by the United States
to work with the nations of this region to create a "US-Middle East Free Trade Area."

As for Iraq, it has suffered decades of tragedy and the task of rebuilding the country’s oil output will be a
long and expensive one. By some estimates, it will cost between $ 30 bn and $ 40 bn to bring Iraq’s oil sector
up to modern-day standards and sustain output at 2-3 mm bpd. At 2 mm bpd, Iraq’s annual oil income might total
$ 15 bn. For the foreseeable future, that won’t be enough to meet the essential needs of the Iraqi people while
rebuilding and growing the country’s energy sector.
Clearly, an infusion of external investment and know-how is needed if Iraq is to further develop its existing fields
and find new ones. The international oil industry, teamed up with the capital markets, is equipped for that job.

Not long ago, the oil consultant Robertson Research International released its annual survey on the nations and
regions most favoured by international oil companies for new exploration ventures. The region of the world viewed
most positively for new ventures was the Middle East. The survey report made special note of the fact that the
companies were polled during January and February when the outcome of the crisis in Iraq was far less certain.
Clearly, the international oil companies understand the promise of this region’s energy resources. And those
firms are encouraged by the steps nations are taking to grow their economies by engaging the capabilities of the
private sector and the support of outside capital. If Middle Eastern attitudes about foreign investment and
privatisation are in transition, it’s not a moment too soon.

Earlier this year, the UN released an exhaustive report on Arab Human Development, which was compiled by a group of
Arab scholars. In their report, the authors underscored the persistent problems in many Arab nations: high illiteracy
rates, the deterioration of education, the slow-down of scientific research and development, poor production bases
and competitive capacity, and mounting unemployment. In particular, they noted the lack of job-creation opportunities
in Arab nations.
About 6 mm individuals enter the labour force each year, but nowhere near that many new jobs become available. The
average unemployment rate is about 15 % across the Arab world and much higher in some individual countries. Over half
of the Middle East’s population is under the age of 18.

Economies of the region should be growing by at least 5 % a year in order to absorb the unemployed as well as provide
jobs for the millions of young people entering the labour pool. For that to happen, we need to:
-- Give full rein to the private sector and to the vast wealth of human capital in the Middle East.
-- Transform the region from one of the lowest internal trade areas to one of the highest.
-- Transform the region from one of the lowest recipients of private investment to one of the highest.
While the development of energy is traditionally viewed as a capital-intensive enterprise, its overall employment
impact can be highly positive. Energy investments generate the need for dozens of various suppliers and services,
many of which can be furnished on a local basis. The jobs provided in these industries in turn help create and
support employment in the financial, retail and commercial sectors.

Peter J. Robertson is vice chairman of ChevronTexaco. This article is based on an address he recently delivered at
the 11th Middle East Petroleum and Gas Conference in Dubai.

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